How Does a Crypto Hedge Fund Collapse?

Three Arrows Capital handled around $10 billion in assets as recently as March, making it one of the world’s most notable crypto hedge funds.

The company, also known as 3AC, is now filing for bankruptcy after a drop in cryptocurrency prices. It has a particularly dangerous trading technique combined to wipe out its assets and leave it unable to repay lenders.

3AC had a long number of counterparties or corporations whose money was riding on the firm’s capacity to stay viable. Since April, the crypto market has lost more than $1 trillion.

Blockchain.com is facing a $270 million hit due to debts to 3AC. Meanwhile, digital asset brokerage Voyager Digital filed for Chapter 11 bankruptcy protection after 3AC was unable to repay the company’s $670 million loans. The US-based crypto lenders Genesis and BlockFi, as well as crypto derivatives platform BitMEX and crypto exchange FTX also had losses.

We can link Three Arrows Capital’s demise to the May collapse of terraUSD (UST)

The stability of UST was based on a sophisticated collection of code. It had very little physical currency to back up the arrangement. On an additional lending platform called Anchor, investors were enticed with a 20 per cent annual interest on their UST holdings. This was a figure that many analysts argued was unsustainable. The risk asset correction, along with less liquidity, has exposed projects that claimed high unsustainable APRs, leading to their failure, such as UST.

The panic selling that accompanied the demise of UST and its sister token luna cost investors $60 billion. The terraUSD and luna collapse is the starting point.